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Penny Stock Basics

17 Stock Market Terms You Must Know for Successful Trading

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Written by Timothy Sykes
Updated 1/20/2023 5 min read

My trading challenge students are SO dedicated to learning, every now and then they go above and beyond the homework I assign them and they create their own homework! Check out this very comprehensive basic stock market terminology project one of my favorite students sent me the other day:

There are many trading terms floating around on financial websites that many people do not truly understand, so I decided to write post going over some of the most important ones that everyone should know.

First, let’s focus on the fundamental trading terms.

1. Buy means that you are buying shares in a stock. When you buy a stock, you want the price to increase. With current technology, you will not get a stock certificate in that mail. Your broker will keep track of this for you.

2. Sell means that you are selling shares in a stock. When you sell, you are either closing a long position or opening a short position (see next term). Again, you will not have a certificate that you have to mail to someone, brokers keeps track of this electronically.

3. Short sell means that you are selling shares that you do not currently own. When you short sell a stock, you want the price to decrease. To short sell you need to borrow the shares from your broker.

4. Buy to cover means that you are closing out your short position by buying the shares. You make money when you sell the shares at a high price and buy them back at a lower price. For example, if you short sell 1000 shares of company ABC at $12 and buy to cover at $11, you would have a profit of $1000.

Next, let’s look at some key terms regarding the companies themselves.

5. Revenues are simply the money received by a company for selling their products/services. Consistent revenue growth is a bullish sign for a company, since companies want enough revenue to pay expenses and then expand their business.

6. Profits/Losses are the positive or negative gain from the operations after expenses. This number is obtained by the equation “revenues – expenses.” For example, say company ABC has revenues of $500,000 and expenses of $260,000. The profit would be $240,000. Example number 2, if company ABC has earning of $500,000 but expenses of $600,000, there would be a loss of $100,000.

7. Earnings per Share or EPS, is the profit (loss) divided by the number of shares outstanding. So say company ABC has a profit of $500,000 and 1,000,000 shares outstanding, this would be $0.50 Earnings per Share.

8. Price to Earnings Ratio or P/E ratio is the price of a stock divided by earnings per share (EPS). Say company ABC was priced at $10 a share when it reported EPS of $0.50 this would imply a P/E ratio of 20. In Tim’s opinion, this term is used too often to determine how expensive a stock is.

Finally, let’s go over some technical terms.

9. Moving averages are the average prices of a stocks over a given time period. For example, a 10 day moving average would be calculated by adding the closing prices of a stock for the last 10 days and dividing the sum by 10.

10. Resistance is a stocks price where sellers often emerge, thus preventing a price increase. When a stock breaks through resistance, this is typically a good time to buy.

11. Support is a stock’s price where buyers emerge, thus preventing a price decrease. When a stock breaks through support, look out below.

12. Breakouts/Breakdowns are moves across key resistance or support. This is arguably the most important term for those interested in trading penny stocks!!!

13. Market valuation is the number of shares outstanding multiplied by the stock price. For example, company ABC has 1,000,000 shares outstanding and a stock price of $10 a share, resulting in a $10,000,000 market valuation.

14. Shares outstanding are simply the number of shares issued by the company. Companies can issue or repurchase shares after their initial offering. Just because company ABC has 500,000 shares outstanding, doesn’t mean that they will always have that amount. They could repurchase 50,000 and thus have 450,000 shares outstanding. Or they could issue 50,000 more shares and have 550,000 shares outstanding. Not all of the shares are available for the average investor to trade.

15. Float is the number of shares that are publicly owned and available for trading. This number does not include the shares held by insiders. This is the number of shares that average investors are able to buy and sell.

16. Restricted shares are the shares held by insiders. These are included in the number of shares outstanding, but not the float. These shares are not available to public investors to buy and sell.

17. Unrestricted shares are shares freely tradable. These are the shares that are available for public investors to buy and sell.

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”